Robinhood Financial, LLC – a registered broker-dealer – settled charges brought by the Financial Industry Regulatory Authority that, from October 1, 2016, through November 9, 2017, it failed to take reasonable steps to ascertain its customers were receiving best execution when it routed equity orders to four broker-dealers in return for payment for order flow. At the time (as now), Robinhood charged its customers no commissions to execute trades.
According to FINRA, under its rules, Robinhood was obligated to conduct an order-by-order review or a “regular and rigorous review” when it relied on third-party brokers to execute its customers’ orders in order to assess execution quality. Since it did not conduct an order-by-order review, Robinhood was obligated to review at least quarterly the quality of its customers’ executions on a security-by-security and type-of-order basis. (Click here to access FINRA Rule 5310 and related guidance.)
FINRA charged that Robinhood failed to meet its due diligence obligations because during the relevant time, it failed to consider the execution quality of its current execution venues and only considered its preexisting venues. Moreover, the firm did not conduct best execution reviews of certain types of relevant orders, including nonmarketable limit orders, stop orders, and orders received outside regulator trading hours.
To resolve FINRA’s charges, Robinhood agreed to pay a fine of US $1.25 million and to retain an independent consultant to review its compliance with FINRA best execution requirements, and adopt and implement all recommendations except under limited circumstances.